In the weeks since the Obama administration announced that it was directing the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%, housing industry observers have each begun to share their prognostications about what the real impact of the FHA’s action will be.
The administration has touted an average savings for new borrowers of around $900 per year, although recent analysis from RealtyTrac showed that the savings will vary significantly for borrowers in different parts of the country.
The administration has also said that the FHA premium cut could help as many as 2 million borrowers. Those figures were echoed by Department of Housing and Urban Development Secretary Julián Castro in a recent interview on The Daily Show with Jon Stewart.
But how many actual home sales will the premium cut add to a housing market that, despite low interest rates, just experienced a weak year?
A new report from Moody’s Analytics suggests that the reduced FHA premiums will result in 45,000 additional new- and existing-home sales in 2015. The report also states that single-family housing starts will jump by 20,000 as a direct result of the FHA cut.
According to the Moody’s report, the FHA premium cut will reach its maximum impact in mid-2016, when Moody’s Analytics’ model expects annualized home sales to increase by 100,000 as a result of the FHA cut, with 40,000 additional single-family housing starts in 2016 as well.
The report also suggests that the FHA premium cut’s increased housing activity will support 140,000 more jobs at its peak, which will lower the unemployment rate by about 0.1 percentage point.
According to the Moody’s report, lowering FHA premiums closes approximately one-tenth of the current labor market gap.
Additionally, the Moody’s report suggests that the FHA premium cut will also lead to an increase in refinancing activity. “The lower FHA premiums also provide an added, albeit small, economic benefit from increased refinancing activity,” Moody’s Chief Economist Mark Zandi and Senior Director of Consumer Credit Analytics Cristian deRitis said in the report.
“This may be especially potent now with the recent sharp decline in long-term interest rates,” the analysts continue. “Mortgage rates broadly have declined by nearly a percentage point since this time last year and are low enough that hundreds of thousands of FHA borrowers are in the money. That is, current FHA loan rates are low enough that it makes financial sense for these homeowners to refinance, particularly with the lower insurance premiums.”
Zandi and deRitis add that housing is on the mend, partly due to policymakers’ efforts.
“However, housing remains far from normal, and policymakers should continue to support it,” the analysts conclude. “While there is no magic policy bullet, allowing the FHA to reduce its insurance premiums for first-time and lower-income homebuyers will provide a meaningful boost. It will also protect taxpayers, as the premiums are high enough to put the FHA on solid financial ground.”